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Most Small Businesses Don’t Quite Fit The Political Picture

Filed by KOSU News in Business.
April 18, 2012

The House is scheduled to vote Thursday on a GOP measure to cut taxes on small businesses.

Now, the mental image most of us have of a small business is probably something like this: a handful of employees, a shop, maybe a restaurant or a little tech firm.

It turns out the reality of the nation’s 28 million small businesses is, in many cases, quite different.

House Republicans say their tax cut would help millions of small businesses.

“This is a bill which will directly help small businesses create jobs,” says Rep. Eric Cantor, R-Va., the majority leader and author of the bill.

The total cost of the one-year measure is $46 billion. An analysis commissioned by a pro-GOP outside group and now posted on Cantor’s website says if the tax cut only lasts for one year, it will create 40,000 jobs. Some quick back-of-the-envelope math puts that at more than $1 million per job.

NPR asked House Speaker John Boehner whether that was cost-effective.

“I think we expect it will create far more jobs than that,” says the Ohio Republican. “But listen, small businesses who file as individuals, as I did in my business, face enormous challenges. And rather than pay these taxes, that money could stay in their business to help them buy more equipment, hire more workers and expand their business.”

But Seattle small-business owner Makini Howell says the bill wouldn’t help her at all.

Well, technically, the tax cut might help her a little. With her family, Howell owns a minimart, a vegan sandwich wholesale business, and a small group of vegan restaurants. All told, Howell has about 30 employees.

“It was great to open up and to be able to create like 25 more jobs than were there and to become a viable part of the neighborhood that we’re in,” she says. “That was awesome.”

Less awesome are the company’s profits at the end of the year, because its margins are thin and so much gets poured back into the business.

“The reality is, you make $25,000, $35,000,” she says. “My income has decreased steadily since I became a small-business owner.”

Under the bill from House Republicans, small-business owners — those with fewer than 500 employees — would be able to deduct 20 percent from their business income, with some exceptions. For Howell, the tax savings would work out to a few hundred bucks.

“For a business like mine, if you just do the math, it’s not going to help,” she says.

It’s not like she’d turn down the extra cash, but it certainly wouldn’t be enough to hire anyone else or to make a major equipment purchase.

Much larger firms and much more profitable companies would get most of the tax benefit, says Joe Rosenberg of the Tax Policy Center. “Your typical small business — what we might think of as your mom and pop store — is probably not going to see much benefit from this tax provision,” Rosenberg says. “The largest benefits go to larger businesses that report a lot of income.”

Although the image of a small-business owner is someone like Howell, under the Small Business Administration definition used by the House bill, a business with 499 employees could also be considered small.

Some 99.9 percent of the businesses in the country are small by this definition. And according to SBA data, the vast majority of them — more than 20 million firms — don’t employ a single person, other than the owner.

Angela Caragan is the owner of A Cupcake Co. in Northern California. She’s also the chief pastry chef, marketing director — the whole thing. Last year, she made less than $1,000 baking gourmet cupcakes. But for her, it’s not really about the money.

“It’s my way of sharing a little bit of smile and happiness with someone on their special day,” Caragan says.

Like many people who report business income on their taxes, Caragan has another job. A full-time job. She wouldn’t qualify for the tax cut, because businesses are required to have employees to take advantage of it.

So the full-time freelance photographer, or consultant who works alone, would be out of luck. Although the assumption is that many of these sole proprietors would reorganize their books and add a family member to the payroll, to get in on the new tax break. [Copyright 2012 National Public Radio]

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